India's Forex Reserves Plunge To 4-Month-Low - What Are The Factors?

India's foreign exchange reserves witnessed a significant decline of $17.8 billion in the week ending November 15, marking the largest weekly fall on record. This sharp drop pushed the reserves to a four-month low of $657.89 billion.

The primary driver of this decline was the strengthening US dollar post-election, which led to increased dollar demand and revaluation losses. Additionally, the Reserve Bank of India ( RBI ) intervened in the foreign exchange market to stabilise the rupee, further depleting the reserves.

The Indian rupee has been under pressure due to persistent foreign portfolio investor (FPI) outflows. In November, FPIs net sold Indian stocks and bonds worth over $4 billion, exacerbating the downward pressure on the currency.

While the decline in reserves is concerning, experts believe that India's overall external position remains relatively strong. Aditi Gupta, economist at Bank of Baroda, noted that the import cover remains comfortable at over 11 months. She expects the reserves to recover to around $675-685 billion by March 2024.

However, the global economic landscape remains uncertain, with geopolitical tensions and potential economic slowdowns posing risks to emerging economies like India. The RBI will need to carefully monitor the situation and take appropriate measures to safeguard the country's financial stability.